Australian Competition and
Consumer Commission
REGULATORY DEVELOPMENTS IN THE NEW MILLENNIUM
Address by the Chairman to open the Regulation Stream
ATUG now2000 Conference
Tuesday 4 April 2000, 2.30-3.05 pm,
Darling Harbour, Sydney
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It is a great pleasure to address the Year 2000 gathering of this conference, which brings
together so many people involved in the telecommunications and related industries in this
country. I congratulate the organisers on the program, and am pleased to participate in it.
I have been asked to look at regulatory developments in the new millennium. And after
nearly three years of deregulation in the Australian telecommunications market, this is
indeed a good time to look forward. The fact that this year will also see a review of the
telecommunications-specific provisions of the Trade Practices Act means that the
regulatory regime will be under continuing scrutiny as the year progresses.
Overview
It is very clear that the telecommunications industry in this country is experiencing major
structural and technological change.
Competition itself is transforming the market.
In 1997, Australia had a protected duopoly in the fixed telephone market, and three
players with statutory protection in the mobile market. The industry was dominated by a
single, vertically-integrated incumbent with enormous market power.
Less than three years later, thirty seven licensed carriers are operating in the market,
together with dozens of carriage service providers and hundreds of Internet service
providers. Most Australians now have a choice of at least two telecommunications
operators for their long distance, international and mobile calls, and competition is now
emerging in local calls and data services as well.
Some areas of the market are, of course, more competitive than others, and there remain
areas of the industry where ongoing regulation is vital.
However, where competitive activity has increased, consumers have benefited from lower
prices. The Commission has cut headline interconnection rates for Telstra’s fixed
network from 4.6 cents to around 2 cents. Retail prices for most services have fallen
substantially.
It is worth emphasising just how large some of those retail price falls have been.
Commission data show that the average prices paid by consumers for long distance calls
fell by nearly 44 per cent in the four years to June 1999. Average prices for international
calls fell by up to 60 per cent over the same period. Telstra’s untimed local call charge is
now 22 cents, although residential line rentals have increased by $2.20 per month. More
recently, we have seen some other operators lower their local call charges to as little as 15
cents, although with some conditions on eligibility.
Consumer benefits from such price changes were estimated conservatively in a recent
report by the Australian Communications Authority at between $300 million and $400
million over each of the last three financial years.
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Consumers have also benefited from new service packages and features, many of which
combine services unimagined a decade ago.
However, it is also evident that some of more entrenched competition issues remain
before us. We are still developing pricing rules for regulated services, and core
competition issues such as adequate provisioning times and service quality remain.
Technological change is also transforming the industry. Together with the changing
nature and extent of competition in the market, it will be one of the major determinants of
regulatory directions in the new millennium.
However, before we look too much further forward, I propose to begin, instead, by
looking back – at the way the regulatory regime operated as the market responded to the
opportunities presented by open competition. That will then provide the right context for
looking forward.
The Commission’s role
The particular responsibilities given to the Commission in July 1997 related to the
structure and conduct of the market and its participants.
The Commission’s job was, of course, to ensure that competition in the Australian
telecommunications market was established and protected.
We helped establish competition by declaring access to specific network services under
Part XIC of the Trade Practices Act. This encouraged entry by removing the need for
competitors to own infrastructure before they could offer services carried by that
infrastructure. It also provided the mechanism for ensuring that any-to-any connectivity
would be a reality.
The Commission initially declared a variety of voice and data-based services which were
already being supplied by Telstra to Optus and Vodafone during the earlier duopoly
period.
We subsequently declared additional data and transmission services, including ISDN, to
allow more competition in new medium-bandwidth services important for data and
Internet applications.
More recently we declared several local access-based services, including an unbundled
local loop service to encourage competition in the markets for local voice services and
broadband services, and a broadcast access service on cable networks.
It is worth pointing out that in markets which the Commission found to be reasonably
competitive, such as the mobiles market, services were not declared. This was the case in
global roaming and long distance mobile services. That is not to say that even in such
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markets competition issues will not arise, as evidenced by the Commission’s recent
mandating of mobile number portability. Consumer sentiment in relation to the mobiles
market is also that airtime charges are too high.
Of course, declarations only establish the right of an operator to access the facilities of
another carrier. Frequently the terms and conditions of that access have also been the
subject of Commission attention.
Access declarations and access pricing were, and will remain, critical to the emergence of
competition in this industry. They ensure that non-distortionary build-buy decisions can
be made by new entrants. The fact that we have seen both interconnection and new
network construction in the post-deregulation period suggests that this process is working.
Our other role, of protecting competition, has been exercised through special
arrangements to monitor and injunct anticompetitive behaviour under Part XIB of the
Trade Practices Act, as well as under the standard competition provisions of the Act.
The Commission is also responsible for monitoring compliance with the price controls on
Telstra, and monitoring prices more generally.
And, of course, our more general competition functions mean that we have also looked at
mergers, acquisitions and consumer issues (including internet scams) when they affected
telecommunications markets.
In exercising these responsibilities, the Commission has worked to develop processes to
ensure that they are conducted fairly, transparently and with some certainty to industry
participants.
We have developed pricing principles for established fixed line services provided by
Telstra, and are reviewing the need for pricing principles for mobile and other services.
We have developed guidelines to explain our role and processes.
We have developed timelines for many of processes.
We have participated in industry self-regulatory arrangements, and made our staff
available to talk to industry groups and forums.
We also contributed to the processes which resulted in amendments to some of our
legislation last year, to improve the effectiveness of the anti-competitive conduct and
arbitration provisions.
We have done all this in consultation with industry and with the other regulatory
agencies.
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I believe that the emerging competition we now see in many areas is evidence that the
Commission has done its job well. The enormous investment going into the industry is
proof that confidence in our processes is high.
I believe that the building blocks now in place have created a firm foundation for the
further development of the market.
The changing industry landscape
The market is now, of course, a very different place than in July 1997.
I mentioned earlier the impact of competition in many areas and of new technologies and
services.
Those developments are very visible. But even greater changes have been happening
beneath the level apparent to consumers. We have seen an unprecedented expansion of
infrastructure, fixed and wireless – particularly, but by no means exclusively, within and
between cities. This has added enormously to the supply of bandwidth and to service
options for consumers. In turn, a genuine wholesale market in bandwidth has been
created, and complex intercarrier arrangements are emerging for originating and
terminating calls.
The investment going into this industry and related industries, such as the Internet, is now
a major stimulus to the economy and will establish a sound basis for income and
employment growth well into the future.
Another important change is that associated with the phenomenon of convergence. I
believe that the wisdom of having a general regulator deal with that industry is
highlighted by this development. A general competition regulator has the ability to take a
broad view of interrelated developments in many industry sectors.
Implications for the regulatory task
As a result of these changes, the nature of the regulatory task is changing. The
competition issues are different in an environment in which competition is becoming
more established in many areas of the market and in which some of the regulator’s initial
tasks (including decisions about which services will be regulated) have been completed or
at least substantially advanced.
The focus is shifting at several levels.
Terms and conditions of access
In the first place, it is moving away from a focus on ensuring access to essential
infrastructure to a focus on ensuring that the terms and conditions of that access are
reasonable.
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With a number of services already declared, with infrastructure continuing to expand, and
with alternative technology platforms capable of offering data and voice services, new
infrastructure bottlenecks are less likely to arise. Interconnection arrangements are, on
the other hand, becoming more complex, with individual carriers now having to deal with
more carriers than before in order to ensure any-to-any connectivity.
This has a couple of implications for us. It means, clearly, that decisions to regulate
further services are likely to become a smaller part of our work. Indeed, the Commission
is examining whether continuing regulation is appropriate for some services. We will be
doing this where we judge that the service, or parts of it, are becoming fully competitive.
We are about to commence a revocation inquiry in relation to transmission capacity on
some intercity routes.
It also means that we are likely to see an increase in the number and complexity of
intercarrier negotiations related to interconnection. The wholesale market is increasing in
complexity and competitiveness. We would like to think that these negotiations will be
conducted largely on a commercial basis, and will be encouraging this.
However, the number of disputes brought to the Commission under Part XIC of the Act
for arbitration has been of some concern to us. We have received far more arbitrations
than were ever envisaged when these provisions were introduced. Complex pricing
arbitrations take time to complete, and raise resourcing issues for the Commission. We
expect the negotiation/arbitration model to become more effective as competition
increases in the market and as we finalise our core work on access pricing which will
provide further guidance to industry on appropriate pricing benchmarks.
The Commission has been very active in ensuring that arbitrations are handled as speedily
as possible. We have made a number of interim determinations and are close to final
determinations in a number of arbitrations. We are also using a variety of dispute
resolution options to speed the processes and to assist parties in resolving disputes
themselves wherever possible.
Non-dominant networks and operators
A second shift of focus is from incumbent and full service players to newer entrants and
non-dominant networks.
Competition has produced more operators in the market and, as a corollary, more
participants in the Commission’s processes.
Facilities-based competition also means that we are dealing with networks and services
which have different technical features and different cost characteristics. We are
developing cost and pricing models to reflect this. Just a few weeks ago, we held a
Round Table on pricing principles for GSM networks, and will shortly be publishing the
outcome of those deliberations.
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Non-price competition
A third shift of focus is from prices to non-price terms and conditions.
Increasingly, non-price terms and conditions of access are influencing the ability of new
entrants to offer services in competition with incumbent operators. Ensuring nondiscriminatory access to operational support systems will be a priority for the
Commission as the wholesale market develops further. While we are wary of
regulatorily-imposed and overly prescriptive uniform access conditions, we will be
working closely with the industry on initiatives such as the ACIF/SPAN
Telecommunications Online Initiative (TOLI). The level of regulatory intervention in
this area will be dependent upon the speed and success of industry initiatives.
Data and higher value services
A further shift in focus is from voice services to data and higher value services.
As competition has developed in the voice services market, prices have fallen
substantially for most services, and are on a downward trend in all the others. This has
delivered considerable benefits to consumers.
It also means that margins are being squeezed on traditional products, such as ordinary
telephone calls. Service bundling is increasing as a marketing strategy, particularly crossproduct bundling such as television and telephony, or telephony and Internet service.
This is clearly a way for companies seeking to build high-value business to achieve a
competitive edge, but also raises competition issues related to the ability of customers to
purchase only part of the bundle. Bundling may also involve the sharing of costs across a
number of services, and has implications for the way we regulate and monitor prices.
Acquisitions and mergers are another response to declining margins and growth in
traditional services.
Merger and acquisition activity
Which brings me to a final example of a shift in focus - from entry to the market to
merger and acquisition activity within markets.
It is clear that the potential benefits from mergers are increasing as the market globalises
and as markets and technologies are converging. They enable firms to take advantage of
changing economies of scope and scale and to leverage their existing services and
customers in new markets.
Mergers between firms operating in essentially different markets have been a feature of
recent times. Some of the mergers which have gained international attention in recent
years have been of this type, typically between telecommunications or Internet firms and
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broadcast or entertainment firms. Their longer term effects on the two markets which are
subsequently straddled by the merged entity and, indeed, the longer term profitability of
the entity, remain to be seen.
Cross-national mergers are also beginning to create firms with a global reach in
telecommunications. New competition issues may well arise as a result of the operations
of such firms across different jurisdictions. We will be watching those developments
carefully.
The pressures underlying such developments appear to be of two types. Operators see the
possibility of entering new markets by merging with existing players in those markets.
So we have seen Telstra acquiring software development, data management and a range
of ‘content’ companies, AAPT concluding negotiations with America Online (AOL), and
a number of well-publicised acquisitions or joint ventures involving telecommunications
players in Australia and other countries (including New Zealand). Some of our own
newer operators are major operators in their own countries, and are clearly leveraging
their experience and size in those countries in our own market. These moves attempt to
exploit the economies of scope from operating simultaneously in both markets.
The second source of pressure for mergers is from attempts to gain economies of scale by
amalgamating operations in the same market. The Ozemail merger, first proposed with
Telstra, and then with eisa, was such an example. Last year’s proposed Optus-AAPT
merger was another such example.
Let me reiterate the Commission’s approach to these issues.
Attempts to increase the efficiency and competitive capability of a company by seeking
new markets or a larger share of the business in an existing market are not a problem for
the Commission. Indeed, in a highly competitive environment, it is natural and desirable
that firms should actively develop strategies for growth, as this fuels innovation and
efficiency.
Only when a proposed merger is judged likely to result in a substantial lessening of
competition, or prevent or hinder it, is it going to be a problem for us. This is more likely
to be the case when the firms in question operate in the same market and hold substantial
market shares or have the potential to develop them. This was the case in the proposed
Optus-AAPT merger. It is much less likely to be the case when the firms operate in
different markets, or when one of them is a small player. This was the case in the
Telecom NZ-AAPT merger.
Conclusion
I would like to conclude by emphasising that the telecommunications industry in
Australia remains an industry in transition. The regulatory developments of the next few
years will reflect its changing needs and capabilities.
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It was always the intention of the Government when it introduced the legislation which
established the current regulatory framework that there would be a progression from
prescriptive, industry-specific regulation to something much closer to the arrangements
for industry more generally. Consequently, review provisions were built into the
legislation. It is one of those provisions which will see the review, this year, of the
telecommunications-specific provisions of the Trade Practices Act.
It is appropriate that, in a year of review, all the participants in the industry should be
reassessing the type and extent of the regulatory regime needed to ensure that competition
can develop and flourish in the interests of all Australians. I would not expect all
participants to reach the same conclusions, but I hope they will all consider the issues
carefully.
Competition is already ensuring, as I mentioned before, that in some areas some
interventions can be reversed, and some price controls relaxed.
We have also seen co-regulatory and self-regulatory arrangements becoming wellestablished. We are seeing good outcomes from many of those processes, including in
the area of industry codes. Others, including number portability and the unbundling of the
local loop, are still in train. Their success or otherwise will become apparent shortly.
But while these developments have brought us a long way, there is still some way to go.
And while the industry remains in transition, I think no-one would dispute that some
regulatory intervention will be needed. Indeed, in network industries such as
telecommunications, there is always likely to be a need for a robust access regime. The
particular features of telecommunications, including the need for any-to-any connectivity,
mean that specific safeguards are likely to remain an important component of the overall
regulatory regime.
The issue is ultimately one of finding the right balance.
Consumers have benefited from significant price falls in existing services and from the
introduction of new services and service packages as competition has taken root in this
industry. The Commission is determined to ensure that such benefits will continue to be
delivered.
(END)